Telco to pay Rs22bn taxes after IHC verdict

ISLAMABAD: A Division Bench of the Islamabad High Court, led by Justice Babar Sattar, has given a verdict in favour of revenue collector in a tax reference filed by a major telco.

The ruling upholds the powers and jurisdiction of the Federal Board of Revenue (FBR) in assessing tax liability on a high-value intra-group transaction involving the transfer of telecom operator’s tower assets. As a result, the teleco is now liable to pay taxes amounting to approximately Rs22 billion ($78 million) on its gain from the transaction.

The assessment order was written by former FBR chairman Amjad Zubair Taiwana when he was serving as Large Taxpayer Unit (LTU), Islamabad, chief commissioner.

According to the FBR’s announcement, this case focused on a 2018 internal asset reorganisation, where the teleco transferred its nationwide tower infrastructure to its wholly owned subsidiary. The disposal of these assets for Rs98.5 billion ($940 million) by the telecom operator was recorded in its financial statements as an accounting gain of approximately Rs75.9 billion. However, the teleco contended that the transaction was not taxable because the asset was disposed of to its wholly owned subsidiary, according to section 97(1) of the Income Tax Ordinance, 2001 (ITO) concerning intra-group transfers. The IHC dismissed the petitioner’s argument, stating that the provision permits a tax-neutral event only if all conditions of section 97 of the ITO are met. This includes ensuring that the written-down value of the transferred asset remains unchanged in the hands of the transferee compared to the transferor, meaning the transaction should not generate any economic value leading to taxable income. The court determined that the transaction was conducted at a fair market value of $940 million, accepted by the petitioner as consideration, thereby violating section 97 of the ITO. Consequently, the court concluded that the gain from the transaction was clearly a taxable event since nothing remained to defer taxation to a later date. Additionally, it ruled that the commissioner had the authority to consider accounting income when evaluating taxable income. While dismissing another petition of the same telecom operator filed against a show cause notice issued under the Federal Excise Act, 2005, the court-imposed cost of Rs100,000 on the petitioner to be paid to the LTO, Islamabad, deputy commissioner (Inland Revenue) within four weeks.